The following definitely has something to do with it. If reserves are dropping, of their exports are plunging & factories closing, if they want to spend on their own economic stimulus in order to build internal consumer demand for the production from those factories, they would have little need to buy Treasuries at 0% return and risk being paid back with less valuable dollars.
China warns of risks from “abnormal” cross-border capital flow
http://news.xinhuanet.com/english/2009-01/06/content_10614803.htm
BEIJING, Jan.6 (Xinhua) — China faces a threat of “abnormal” cross-border capital flow because of global financial tumult, the country’s foreign exchange regulator said Tuesday.
Such capital movement, resulting from the world economic slowdown and financial crisis, will bring with it potential risks, said Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE).
China has cut interest rates and seen its economy slowing down since the global financial crisis hit the country’s exporters. That could reduce its attraction to foreign investors and lead to capital outflows.
More money flowing out of the border could increase the risk of liquidity strain in the country, which is especially dangerous amid the global financial crisis.
“Where the money will flow to is quite uncertain,” Hu was quoted as saying in a statement on the SAFE website.
China’s foreign exchange reserves had fallen for the first time since December 2003, Cai Qiusheng, a SAFE official, told a conference last month. He didn’t give specific data of when that happened or by how much.
He said the current reserves were below 1.9 trillion U.S. dollars, the level recorded at the end of September. It was the largest reserve in the world.
The SAFE will improve management on fund flows in and out of the border and more closely monitor the balance of payments, said Hu.
He urged for better risk control in managing foreign exchange reserves, which was “the last safeguard” against risks.
China’s central bank said Tuesday it will also strengthen scrutiny of cross-border capital flows and study ways to tackle “abnormal changes” in the balance of payments.
The People’s Bank of China said it will check the validity of trade payments and step up supervision on individuals carrying foreign currencies in and out of the country.
And this...
China Losing Taste for Debt From the U.S.
http://www.nytimes.com/2009/01/08/business/worldbusiness/08yuan.html?ref=world
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.
But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.
“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.
China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.
For now, of course, there seems to be no shortage of buyers for Treasury bonds and other debt instruments as investors flee global economic uncertainty for the stability of United States government debt. This is why Treasury yields have plummeted to record lows. (The more investors want notes and bonds, the lower the yield, and short-term rates are close to zero.) The long-term effects of China’s using its money to increase its people’s standard of living, and the United States’ becoming less dependent on one lender, could even be positive. But that rebalancing must happen gradually to not hurt the value of American bonds or of China’s huge holdings.
The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinationals are hoarding their cash and cutting back on construction of new factories.
The second trend is that the combination of a housing bust and a two-thirds fall in the Chinese stock market over the last year has led many overseas investors — and even some Chinese — to begin quietly to move money out of the country, despite stringent currency controls.
So much Chinese money has poured into Hong Kong, which has its own internationally convertible currency, that the territory announced Wednesday that it had issued a record $16.6 billion worth of extra currency last month to meet demand.
A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses. That would give China considerably less to spend abroad than the $50 billion a month that it poured into international financial markets — mainly American bond markets — during the first half of 2008.
China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of appearing to be torpedoing American chances for an economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.
“This is a political decision,” he said. “This is not purely an investment decision.”
And finally...
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_323157.html
ASIAN nations can work together to get through the global financial crisis ahead of the United States, but Japan and China must take the lead, a leading UN economics adviser said on Wednesday.
Increased consumption and investment within Asia could make up for lower demand from Western countries while spurring economic activity, he added.
Because consumer demand had fallen in the West, ‘we’ll have to rely on public spending,’ particularly on government services and infrastructure, all of which Asia needs ‘desperately,’ he said.
China, with its almost two trillion dollars in reserves and massive current account surplus, should focus on sustaining its internal growth while buying more from the region, he advised.
‘China’s main role should be to keep the Chinese economy growing and keep buying from the rest of the region,’ said Sachs.
‘It’s got to be the main demand centre for the region,’ he said,